Are the determinants of foreign direct investment the same within the service sector? Evidence from bootstrap based bias corrected fixed effects model

• Published date: 01 December 2022
• Author: Jithin P,Sureshbabu M
• Date: 01 December 2022
• DOI: http://doi.org/10.1002/pa.2768

RESEARCH ARTICLE

Are the determinants of foreign direct investment the same

within the service sector? Evidence from bootstrap based bias

corrected fixed effects model

Jithin P

1

| Sureshbabu M

2

1

Department of Economics, Christ University,

Bangalore, India

2

Department of Humanities and Social

Sciences, Indian Institute of Technology

Madras, Chennai, India

Correspondence

Jithin P, Department of Economics, Christ

University, Bangalore.

Email: jithinpchand21@gmail.com

Using sectoral as well as subsectoral foreign direct investments (FDI) data, we

explore the determinants of FDI in services at both sectoral and sub-sector levels of

25 emerging economies for the period 1999–2016. We employ a bootstrap-based

bias-corrected fixed effects model to analyze whether FDI's determinants vary within

the service sector. Our results show that market size, market potential, natural

resources endowments, and agglomeration effects are positively associated with the

FDI in services and its subsectoral levels. The sectoral disaggregated analysis shows

that the variables that attract FDI in services do not vary much from financial to non-

financial services. This study suggests that there is no need for a separate theory for

explaining FDI determinants in financial and nonfinancial services though some modi-

fications are to be made. Before making modifications, we have to consider the

salient features of service sector FDI, such as intangibility, inseparability, perishability,

heterogeneity, and commercial presence.

KEYWORDS

emerging markets, FDI, service sector

1|INTRODUCTION

Attracting foreign direct investments (FDI) is a vital component in the

development strategy of both developed and developing economies.

Developing and newly industrializing economies have been relying on

foreign direct investments to supplement domestic savings through

capital inflows in order to promote economic development. In addi-

tion to the investible funds available, FDI can produce externalities

through technological transfer and spillover effects that would have

long-lasting impacts on the economy (Balasubramanyam et al., 1996;

Carkovic & Levine, 2005). Further, FDI is considered less susceptible

to financial crises mainly because foreign investors have a long-term

perspective when investing with the destination economies.

According to the UN World Investment Report (2015), global flows of

FDI show a spurt in recent years, attaining a world level FDI of 1.7 tril-

lion US $ in 2015 compared to the US $ 159 billion in 1991. A key

factor propelling this spurt in recent years is the outpouring flows of

FDI in the service sector. For example, in 1970, FDI in services

accounted for 25% of total global FDI stock; in 1990, the share of ser-

vices FDI skyrocketed to 50%, and in 2005 the share of the service

sector in the total global stock of FDI rose to nearly two thirds (UNC-

TAD, 2007). This indicates the outpouring of service sector FDI to the

emerging economies at the expense of FDI in manufacturing and FDI

in agricultural sectors. The main benefits of service sector FDI are

profit-seeking producer services, which includes financial and non-

financial services to network-intensive subsectors services FDI like

telecommunication, transport, and electricity. Given this backdrop, we

can argue that share of the service sector in world GDP that is larger

than the share of service sector FDI to the global stock of FDI. This

indicates that the services sector is regulated and restricted as com-

pared to other sectors.

The structural shift of FDI inflows to the emerging economies has

brought profound changes to the economies, mainly in terms of the

role or implications of FDI to output, trade activities, and employment.

Nonetheless, empirical investigation of the determinants of FDI across

sectors and within sectors is limited due to data limitations. The

Received: 10 October 2020 Revised: 21 September 2021 Accepted: 26 September 2021

DOI: 10.1002/pa.2768

J Public Affairs. 2022;22(Suppl. 1):e2768. wileyonlinelibrary.com/journal/pa © 2021 John Wiley & Sons Ltd. 1of11

https://doi.org/10.1002/pa.2768